2013 Buyer's forecast: Fuel

Uncertainties abound for corn and soybean production in 2013. Potential drought, crop insurance payouts, and commodity prices are just a few major unknowns. To help growers prepare for the next year, Farm Industry News put together a buyer’s forecast of interest rates and the costs of production inputs and land. Featured here is the 2013 forecast for fuel.
The rest of the input forecasts may be found here:
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While there is no crystal ball for exactly predicting future fuel prices, experts expect that fuel prices in general will remain stable in 2013 and may even be slightly lower than 2012 prices.

The U.S. Energy Information Agency (EIA) released its predictions for average fuel prices for 2012 and 2013 on Oct. 10, which show that diesel fuel prices will average $3.81 per gallon in 2013, compared to an average of $3.98 per gallon in 2012. Regular gasoline prices will average $3.61 per gallon for this year, while 2013 prices will average $3.44 per gallon, according to the EIA’s report.

These predictions should come as a relief to farmers after a tough 2012 growing season paired with high fuel prices at certain times throughout the year.

Leveling out

“We had some pretty high prices this summer and fall and barring any major global event — something that could trigger a spike in prices — we probably wouldn’t tend to see prices get much higher,” says Justin Fuller, director of CHS refined fuels operations and pricing.

But Fuller notes that several unpredictable factors can cause fluctuations in the market.

“We have to take into account several things that affect the market. One of the biggest things is turmoil in the Middle East,” Fuller says. “Incidents that happen in the Middle East tend to have an impact on our own market.”

Fuller also explains that demand plays a significant role in the price of fuel, particularly at certain times of the year.

“With commodity prices going to the levels they’ve been here recently — and crop prices for corn and soybeans have increased quite substantially — when that happens, the demand for fuel is going to go up primarily in the spring and fall,” Fuller says.

Plan ahead

Farmers therefore can plan a number of ways to save money on fuel, even if prices do remain stable in 2013, since fuel comprises a significant portion of the farm budget. Spring planting and fall harvest represent times when diesel fuel demand is high, so planning around those times and considering buying in bulk ahead of time can reduce costs.

“December, January, February — times when there’s much smaller demand — is usually, but not always, a better time to buy fuel for price reasons,” Fuller says.

A farmer’s crop production methods can directly affect how much fuel is used overall, especially tillage practices (see Breaking down the fuel budget).

“Farmers can cut down on diesel costs by adopting no-till or lower-till,” says Bruce Babcock, economics professor at Iowa State University.

Other methods to save on fuel prices on the farm include regular engine tuneups, maintaining properly inflated tires on each piece of equipment and avoiding aggressive driving of machinery.

Breaking down the fuel budget

The following are two 2012 budget examples calculated by Roger Wilson, farm management/enterprise budget analyst at the agricultural economics department, University of Nebraska–Lincoln, which show how fuel price changes affect different crops using different tillage systems. The department is still calculating the 2013 budgets.

The price of $3.50 per gallon for diesel was used to calculate the 2012 budgets.

The first budget was for a crop that used a heavy amount of fuel for ridge-till, pivot-irrigated corn. Fuel use for the corn budget included energy for pumping irrigation water.

The second budget was for a crop that didn’t use much fuel: no-till, dry land soybeans.

At $3.50 per gallon, fuel costs were $123.40 per acre for the ridge-till, pivot-irrigated corn budget and $10.98 per acre for the no-till, dry land soybean budget. If, for example, the price of fuel increased by $1.00, from $3.50 to $4.50 per gallon, the fuel price per acre for the ridge-till, pivot-irrigated corn went up more than $35 per acre to $158.78. This contrasted to just more than $3.00 per acre increase for no-till, dry land soybeans to $14.12.

Looking at this hypothetical fuel price spike in terms of cost per unit of production showed the cost to produce a bushel of corn would increase $0.16 per bushel, from $4.19 to $4.35 using 2012 budget costs, which amounts to an almost 4% increase for ridge-till, pivot-irrigated corn. This contrasted to a $0.07 increase per bushel for no-till, dry land soybeans, from $6.41 to $6.48 using 2012 budget costs, which amounts to about a 1% increase.